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COMPANIES ACT Definition of CompanyCompany means a company formed and registered under the Companies Act.

Definition as per General Law A company is an incorporated association which is an artificial person created by law having a common seal and perpetual succession NATURE OF CORPORATE FORM AND ADVANTAGES 1. Independent corporate existence he company is a distinct legal persona e!isting independent of its members. "y incorporation under the act# the Company is vested with a corporate personality which is distinct from the members who compose it. So o!on "#s. So o!on $ Co. $r. %olomon was a shoe manufacturer. &is business was in sound condition and there was a substantial surplus of assets over liabilities. &e incorporated a company called %olomon ' Co. Ltd. which too( over the proprietory business of $r. %olomon. %olomon and his two sons constituted board of directors. he business was transferred to the company for a consideration of )**** pounds. +n payment %olomon was allotted debentures of ,**** pounds which were secured by a charge on the assets of the company. -ne share each was given to . family members of %olomon family and all the remaining shares were ta(en by $r. %olomon. he company went into li/uidation within a year. he assets were not sufficient to pay off the liabilities. hus after paying off the debentures 0secured creditor1# nothing would be left for unsecured creditors. he unsecured creditors# therefore# contended that# though incorporated under the Act# the company never had an independent e!istence2 it was in fact %olomon under another name2 he was the managing director# the other directors being his sons and under his control. &is vast preponderance of shares made him absolute master. he business was solely his# conducted solely for and by him and the company was a mere sham and fraud# in effect entirely contrary to the intent and meaning of the Companies Act. "ut it was held that %olomon and Co. Ltd. was a real company fulfilling all the legal re/uirements. %ondo i Tea Co. &td. Re. Certain persons transferred a tea estate to a company and claimed e!emptions from ad valorem duty on the ground that they themselves were the shareholders in the company and# therefore# is was nothing but a transfer from them in one to themselves under another name.

3e4ecting this# the Court observed5 6 he company was a separate person# a separate body altogether from the shareholders and the transfer was as much a conveyance# a transfer of the property# as if the shareholders had been totally different persons.7 '. &i!ited &ia(i it) -ne of the primary and accepted motivations behind incorporating a company is to limit personal ris(s by obtaining the benefit of limited liability. he liability of a member is limited or restricted to the nominal value of the shares ta(en by them or the amount guaranteed by them. 8o member is bound to contribute anything more than the nominal value of the shares held by him. *. Perpet+a S+ccession An incorporated company never dies. +t is an entity with perpetual succession. 9erpetual %uccession means that the membership of a company may (eep changing from time to time but that does not affect the companys continuity. he death or insolvency of individual members does not in any way affect the corporate e!istence of the company. A#" and C are the only members of a company holding all its shares. heir shares may be transferred to or inherited by :#; and <# who may# therefore# become the new members and managers of the company. "ut the company will remain the same entity in spite of the total change in membership. ,. Separate propert) A company# being a legal person is capable of owning# en4oying and disposing of property in its own name. he company becomes the owner of its capital and assets. he %hareholders are not the several or 4oint owners of the companys property. A member does not even have an insurable interest in the property of the company. +n $acaura v. 8orthern Assurance Co. Ltd.# a person was the holder of nearly all the shares# e!cept one# of a timber company and was also a substantial creditor. &e insured the companys timber in his own name. he timber having been destroyed by fire the insurance company was held not liable to him. -. Trans.era( e S/ares According to section =, of the Companies Act# >?@. the shares or debentures or other interest of any member in a company shall be moveable property transferable in the manner provided by the articles of the company. hus incorporation enables a member to sell his shares in the open mar(et and to get bac( his investment without having to withdraw the money from the company. his provides li/uidity to the investor and stability to the company. 0. Capacit) to s+e and (e s+ed A company being a body corporate can sue and be sued in its own name. 1. Pro.essiona Mana2e!ent he corporate sector is capable of attracting the growing cadre of professional managers. +ndependent Aunctioning of these managers is assured because of the fact that there is no human employer and the shareholders e!ercise only a formative

control. Also# with the financial bac(ing that companies are able to provide# these managers are able to develop the business to a considerable e!tent. 3. Finances he company is the only medium of organiBing business which is given the privilege of raising capital by public subscriptions either by way of shares or debentures. Aurther# public financial institutions lend their resources more willingly to companies than to other forms of business organiBation. DISADVANTAGES 1. &i.tin2 o. corporate "ei he theory of separate legal entity cannot be pushed to unnatural limits. Circumstances must occur which compel the courts to identify a company with its members. he corporate veil is said to be lifted when the court ignores the company and concerns itself directly with the members or managers. he following grounds have been well established. a1 Determination of character -ccasionally it becomes necessary to determine the character of the company# for e!ample# to see whether it is 6enemy7. Daimler and Co. vCs Continental yre and 3ubber Co. A company was incorporated in Dngland for the purpose of selling tyres manufactured in Germany by a German company. he German company held bul( of the shares in Dnglish Company. All the directors were also Germans. During the Airst Eorld Ear# the Dnglish company commenced an action against its customer to recover the debts. he /uestion was whether the company had become an enemy company and therefore# should be barred from maintaining the action. +t was held hat a company incorporated in Dngland is definitely a legal entity but it may assume an enemy character when persons in de facto control of its affairs are residents in enemy country. Accordingly the company was not allowed to proceed with the action. b1 Aor the benefit of revenue 0Govt.1 Dinshaw $ane(4ee 9etit 3e. "acha A.GaBdar vCs C.+. . he assessee was a wealthy person having huge investments income by way of dividends and interest. &e formed four limited companies and transferred all investments to these companies. +ncome from investments was credited in the accounts of companies and the

companies handed bac( the amount to him as a pretended loan. his way he divided his income into ) parts and reduced his ta! liability. +t was held that the companies were formed purely to avoid ta! liability and the company was nothing but the assessee himself. c1 Araud or improper conduct Gilford $otor Co. vCs &orne &orne was appointed as a managing director of the plaintiff company in the condition that# 6he shall not at any time while he shall hold the office of a managing director or afterwards# solicit or entice away the customers of the company.7 &is employment was determined under an agreement. %hortly afterwards he opened a business in the name of a company which solicited the plaintiffs customers. +t was held that 6the company was a mere cloa( or sham for the purpose of enabling the defendant to commit a breach of his covenant against solicitation. '. For!a it) and expense +ncorporation is a very e!pensive affair and re/uires a number of formalities to be complied with. *. Co!pan) is not citi4en A company# though a legal person# is not a citiBen either under the Constitution of +ndia or under the CitiBenship Act. &ence it cannot en4oy the fundamental rights guaranteed to citiBens.

PRIVATE COMPANYA private company means a company which has a minimum paid-up share of one la(h rupees and which by its Articlesa1 restricts the right to transfer shares b1 limits the no. of its members to ,** not including i1 present employee-members ii1 past employee-members c1 prohibits invitation to public to subscribe for any securities

PUBLIC COMPANY9ublic company means a company whichi1 is not a private company ii1 has a minimum paid-up share capital of five la(h rupees iii1 is a private company which is a subsidiary of a public company. HOLDING & SUBSIDIARY COMPANIESA company shall be deemed to be a subsidiary of anot/er if a1 that anot/er controls the composition of its "oard of Directors2 +f & Ltd. has the power to appoint or remove the ma4ority of directors of % Ltd# then % Ltd. is subsidiary of & Ltd. +t is not necessary that ma4ority of the directors of one company are also the ma4ority of the directors of another company. b1 that anot/er holds more than half in nominal value of its e/uity share capital2 or +f & Ltd. holds shares of the nominal value of 3s. @**> of the total nominal share capital of 3s. >*#*** of % Ltd.# then % Ltd. is subsidiary of & Ltd. c1 it is a subsidiary of that anot/er5s subsidiary +f % Ltd. is a subsidiary of & Ltd. and %% Ltd. is subsidiary of % Ltd. then %% Ltd. is a subsidiary of & Ltd. also. ONE PERSON COMPANYCompany which has only one person as a member SMALL COMPANY$eans a company# other than a public company and havinga1 9aid up share capital not e!ceeding 3s. @* la(hs# or b1 urnover of which as per its profit and loss statement does not e!ceed 3s. , crores SECTION 3 COMPAN6 Aeatures-

Dstablished for promotion of art# science# religion# charity# sports etc.- useful ob4ect +ncome applied in promoting the ob4ect and payment of dividend to members is prohibited INCORPORATION OF A COMPAN6 1. SELECTION O A NAME Guidelines to be followeda1 +dentical or resembling name- he proposed name cannot be identical or too nearly resembling the name of an e!isting company. b1 Fustifying the business of the company- he name shall 4ustify the business of the company c1 he name shall have a proper prefi! d1 Gse of certain words not allowed- (ing# emperor e1 Certain words are allowed only if conditions prescribed are complied-+nternational f1 9honetic resemblance not allowed g1 ranslation of e!isting companyHs name not allowed he name must contain the wordCs &i!ited# Pri"ate &i!ited depending upon the type of company. Section '- Co!pan) Aeatures5 >1 Dstablished for promotion of art# science# religion# charity# sports etc.- useful ob4ects ,1 +ncome applied in promoting the ob4ects and payment of dividend to members is prohibited. S+c/ co!panies need not /a"e t/e 7ord &i!ited or Pri"ate &i!ited as part o. t/eir na!e. e.g. Cric(et Club of +ndia# 8G-s !. SUBMISSION O CERTAIN DOCUMENTS he following documents are to be submitted to the 3egistrar of Companies of the state in which registered office of the company is to be situated. i1 $emorandum of Association -$CA- +t is the constitution of the company CLAUSES OF M/A >. 8ame ,. 3egistered -ffice I. -b4ects

). Liability @. Capital ii1 Articles of Association- ACA J +t contains rules and regulations for internal management of the company iii1 Aorm 8o. >= giving the address of the registered office of the company iv1 Aorm 8o. I, in duplicate giving the particulars of board of directors. v1 Aorm 8o. > certifying that all the provisions of the Companies Act relating to incorporation are complied with. ". PAYMENT O PRESCRIBED EES AND STAMP DUTY he promoters are also re/uired to pay the prescribed fees to the 3egistrar of Companies and the Govt. stamp duty J which are fi!ed on the basis of authoriBed share capital of the company. -n completion of the above formalities# the 3egistrar of Companies issues Certificate of +ncorporation of the company.